The Dollar Giveth and the Dollar Taketh Away

Over the last few trading days, it has primarily been the strength or weakness of the U.S. dollar that has been the single greatest influence on the price of gold. Yesterday’s six-dollar decline was almost entirely (95%) due to dollar strength. Today’s five-dollar advance has also been almost entirely predicated on the dollar, in this case, dollar weakness.

The U.S. dollar has been in an absolute freefall since the beginning of 2007. The dollar index, which traded to a high of just above 103 on January 3, has now fallen to 93 for a net decline of 10 points. That converts to a 10% drop in value when compared to the basket of currencies the dollar index is paired against. During the same period, gold prices have advanced approximately 12%. The obvious conclusion is that U.S. dollar weakness this year has greatly contributed to the advance in gold prices.

An interview with MarketWatch, Ole Hansen, head of commodity strategy at Saxo Bank said, “Gold has remained range-bound between $1,200 and $1,300 for most of this year. The dollar weakness and increased uncertainty about Trump’s ability to pass his pro-growth agenda have been two of the major components helping to offset the focus on higher rates, low volatility, and rising stocks.”

New Data Indicates a Shift in Market Sentiment Towards Gold

However, that is likely to change as renewed interest in gold has been witnessed recently. According to the most recent COT (Commitment of Traders) report, published each Friday by the CFTC (Commodities Futures Trading Commission), there has been a steady increase of net long positions in gold. This trend has been widespread amongst money managers and hedge funds, but also includes individual investors, traders, and market participants. This marks the fifth consecutive week in which individual investors, as well as institutional professionals, have accumulated larger gold positions.

Based on the latest report, the accumulation of net long positions has increased by 30% in just one week. This large change has swelled the number of open positions from 138,566 to 179,537 in a single week.

Whether this dramatic shift in market sentiment towards gold is based upon a more dovish Federal Reserve and the ECB, geopolitical tension with North Korea, or the domestic political chaos which seems to be growing, the data suggests an increasing bullishness towards safe haven investments such as gold.

The truth of the matter is that this dramatic shift is probably due to a combination of the factors mentioned above, and it is this combination of factors that could fuel a dramatic rise in gold prices.

Wishing you as always, good trading,